Since my ETF post last week, I’ve been having a lot of conversations with people about investments and what to do and what to think about.

And then someone mentioned a fixed deposit to me. So let me start by saying that I am heavily biased (which is a bit of an understatement).

A Metaphor

Investing is much like trying to pick up a date in a club. There’s heavy music, the lights are flashing, and the clothing is skimpy. Everyone is amped to party. And because you’re the one with the wallet, there is no shortage of option for the night. Although there are a few models in the corner who have set themselves up as reserved for the VIPs.

But whatever – those kids are high-maintenance put-a-ring-on-it goldplatinum-digging hoes, yo.

As a general observation, I think that the alcohol would be considered leverage. Because it can end in one of two ways:

1. Either it gives you both the dutch courage to approach the hottest catch in the room, and calms the nerves enough to make you dashing and smart over the uns uns uns. Which is winning.
2. Or beer goggles. Which is the opposite of winning.

Against this smorgasbord of potential good times, going home with a fixed deposit is the financial equivalent of leaving the club, walking downstairs onto the street, and picking up a roadside hooker of indiscriminate gender.

And to be clear, you’re going to pay money for that privilege. Especially when you realise that your wallet is gone in the morning.

But hey – at least you’re in control of proceedings at the time. You’ve, um, controlled for the risk of rejection. But we’ll just ignore the other stuff (like the implications of wallet loss and the potential fresh case of crabs that just started foraging in the moist areas).

Redefining A Fixed Deposit

The classic definition of a fixed deposit is one where you give your money to the bank for a set period of time for a fixed amount of interest (eg. a 2 year FD at 5%). There are some minor intricacies around the compounding of interest (does it compound annually, quarterly, monthly, etc?), which becomes properly impactful as your investments grow in size – but in that scenario, my question would still be: “what the hell is it doing as a fixed deposit?”

FDs are seen as very safe, because the money is usually kept with a bank (and those tend to be bailed out in a crisis), and your return is fixed at a given rate of interest.

However, it should really be defined as:

fixed deposits. n. an investment strategy whereby you relinquish your buying power to a third party, and then pay them for the privilege of spending your money when you need it.

The Problems

The general argument in favour of fixed deposits (apart from the safety one) is that it’s a sensible way to keep money that you’re not using, but retain the flexibility to withdraw it (for a penalty) if you do suddenly need it.

Observation:

1. If you’re not using the money, then invest it (in a unit trust or ETF, for example – and you can get low risk ones if you’re into that);
2. And if you might need the money, then just keep it in cash. Because once you take the earned interest and subtract the penalty fee for early withdrawal, you just might as well have done that in the first place.
3. Or, better yet, just put in that unit trust/ETF anyway, because you won’t get charged such a penalty for withdrawal (unless you select a really bad unit trust/ETF).

Also, while your nominal money might be safe, the return is fixed. So when the exchange rate weakens, or inflation leaps, your money is far from protected. In real terms*, your money is worse off.
*by “real” what I mean is: “in terms of what your money can buy you” and/or “purchasing power”. As opposed to “nominal” terms, which is really just a number.

If anything, fixed deposits are there for situations where you literally have no choice, or the money is not yours.

Situations Where Fixed Deposits Make Sense

Almost any situation where you need a specified amount of money at a clearly-identifiable point in the almost immediate future.

Examples:

• Housing Deposits: if you’re buying a house, and you have money set aside to put down a deposit, then it is far more important that the capital value of that deposit be kept safe. That’s not really money that you need a return on – so FDs are appropriate.
• Rental Deposits: if you’re renting to someone, and they’ve paid you a deposit, then you need to hang on to their money for future refunds. It’s not your return – so from your perspective, putting it somewhere “safe” is the best option. And you’re only going to be returning the nominal amount, so it doesn’t matter if there’s exchange rate issues or inflation.
• Escrows: when you’re a lawyer, and you’ve been entrusted with some money that belongs to one of two parties in a deal, which is going to be held in suspense until such time as some requirement is fulfilled, then again: not your money, not your return, so you want it to be put somewhere that’s nominally safe.

In which case, go right ahead and take the advice of the nice lady in the bank with the sharply painted fingernails. Because it probably is better than doing nothing.

Unless there are crabs.